The Wrath of the Finance Minister
On 27 February 2020 at Guwahati, the chairman of State Bank of India (SBI) reportedly publicly faced the wrath of the finance minister (FM) since as many as 250,000 saving bank accounts belonging to tea garden workers in Assam had become dormant due to lack of acceptable know-your-customer (KYC) requirements. The result was that transfer of funds under the direct benefit scheme to these accounts could not take place.
 
Naturally, the FM was upset, considering that virtually the sole benefit of establishing accounts under PMJDY (Prime Minister Jan Dhan Yojana) from the government’s perspective (it was through and through a government initiative) was to enable such funds transfer. It was sold and accepted by all and sundry on this basis and the political benefits of such cash transfers are huge. The incident was not in good taste and was criticised heavily by many, especially the PSU banking fraternity. 
 
The department of financial services (DFS), the banking industry and, of course, the politicians involved have been congratulating themselves on the humongous numbers of deposit accounts opened under PMJDY since 2014.
 
But initial assessment of utilisation of these accounts suggests that, after the accounts were opened, regular operations were limited. Many of the accounts were opened with zero balance just to boost the figures of the number of accounts opened. Later, to mask the fact that there were no operations in these accounts, bankers deposited paltry sums into them. 
 
The KYC requirements for such accounts are minimal and it is difficult to see how KYC requirements could not have been done when they were initially opened. In all probability, the accounts became dormant because the account-holders did not find it either convenient or cost-effective due to which it had little utility for the so-called beneficiaries and naturally there was little usage and no incentive for ensuring that basic account maintenance requirements like KYC is done on a regular basis. 
 
Classifying accounts in which there are no operations for long periods as 'dormant', i.e., no further operations being permitted without specific actions (like verifying the genuineness of the account holder through fresh KYC) is a well-accepted standard operational banking requirement to ensure that a customer’s account is not misused, and for prevention of fraud.
 
The prime purpose and utility of deposit accounts (such as those opened under PMJDY) is that it supports in de-risking consumption levels and smoothens expenditure by insuring the depositors against income shocks and emergencies – something which can make a difference between life and death for people living beyond the pale. 
 
This aspect seems to have got missed totally in the entire publicity narrative. From the politician’s point of view, PMJDY has been promoted as an easy and cost-effective means of transferring direct cash benefits with an eye on electoral gains and has largely remained that – as amply reflected by the incident at Guwahati. 
 
If there were regular transactions in these accounts, it would have ensured that they did not get classified as dormant and would be operational when the government wanted to make funds transfer. It is highly doubtful if any of the banks involved (or the Reserve Bank of India—RBI) are sincere to the real purport of these accounts or took any concrete steps proactively to ensure regular operations in these accounts. 
 
The normal situation today is that for most daily workers making a transaction at the branch (deposit or withdrawal) is likely to mean a longish travel and losing one day’s earnings. Payment banks are a much-touted alternative, but to transact on an account with such a bank a person needs, at the minimum, a smart phone, an Internet Connection, and some level of literacy.
 
 
How many Indians, especially in the bottom 20%, would qualify even in one of these three essential requirements! Even more, customers should have an intrinsic trust that they would not get cheated while transacting. 
 
Banks seem neither to have any incentives to improve utilisation of JDY accounts nor the business acumen as to think through how reducing transaction costs through use of technology could convert these myriad small accounts into a hugely profitable business opportunity in terms of giving them a huge pool of stable low-cost deposits. 
 
Moreover, well-functioning deposit accounts can help a much larger set of our population since many more people can use deposit services than loans.
 
There is empirical evidence from across the world that the poor really value the small financial savings they are able to make if convenient depository services are made available and many a time are willing to borrow at a higher rate of interest rather than break the deposit. 
 
A major reason for the regular occurrence of Ponzi schemes seems to be the absence of such depository services which forces people to look for means of keeping their savings in schemes which give a positive real rate of return – something which our banking system has consistently failed to do. 
 
Safe, convenient and liquid deposit services also help increase the savings rate of the country, thereby reducing dependence on foreign financial investments as amply seen in the circumstances of many countries – Japan, Taiwan, and Germany. And, of course, this has been one of the much-touted benefits post-nationalisation with the opening of a large number of bank branches in the country. 
 
Large non-performing assets (NPAs) are not the only indicator of our deeply dysfunctional banking system on account of 50+ years of mis-governance–it is apparent in each and every aspect of their operations – failure in providing basic deposit services is just one of them. 
 
Looked at from the perspective of the main promoter of the Bank and as a politician, SBI failed in ensuring continued operations in these accounts. From the perspective of majority promoter and investor, SBI failed to realise and convert the opportunity of having such a large number of accounts into a viable business proposition.
 
Considering the entire gamut of circumstances, the wrath of the FM does not seem to be misplaced.
 
(The author worked with various banks - public, private, and foreign both in India and abroad - for nearly 30 years and is currently on a self-imposed sabbatical to try and understand as to what ails Indian banking and what, if anything, can be done to improve its functioning.)
Comments
baskarans53
8 months ago
At the outset I want to know whether SBI and other PSBs were compensated properly for opening these accounts and 95% of these JAM accounts were opened by PSBs. When I visited a few PSBs I could see huge crowds for opening such accounts crowding out branches and many deposit and other HNI customers left without transacting on seeing huge crowds. Media never highlights the indifference of private sector banks to such financial inclusion but compare EPS, PE and BV of these two sectors. Government should remunerate PSBs sufficiently for such social projects so that they can partly outsource such work which is a win win for all.
vikas.322
11 months ago
Sushil,
Revisit the 5th paragraph, it says," to ensure a customer's account is not misused for prevention of fraud".
Prevention of fraud is not a misuse.
2. It seems your argument is that once the accounts have been opened it is for the Bank to ensure that the account holder earns enough to be able to save something to ensure that the accounts are used regularly.
3. Banking as a healthy habit is everyone's responsibility. In the instant case the accounts belonged to Tea Estate Workers and the complaint of dormant accounts was made by the Assam Government. Had the same Government mandated payment of wages through these accounts such a situation would not have arisen.
4. Further the KYC issue involved 'proof of residence'. Most of these workers stay on the tea estates in shanties provided by the estate itself. As there are no ownership papers the estates could have easily certified their resident status which they did not do for fear of creating some kind of a right in favour of the resident. Again Assam Government or its revenue officers could have found a way out but did not.
5. RBI was well aware of this and could have waived the proof of residence requirement but did not as these requirements emanate from the Prevention of Money Laundering Act.
6. Central Government of which the FM is a leading luminary could have exempted the tea estate workers from this requirement but chose not to.
And the fall guy was a poor banker who was trying to fulfill his Regulatory and Statutory obligations.
sushilprasadassociates
Replied to vikas.322 comment 11 months ago
1. Banks need to realise the utility of enabling small value deposit accounts as an attractive business proposition which use of technology for reducing transaction costs enables since it would give them large stable low cost deposits. Moreover, there is a very strong latent need for such products. Please also see the article Savings - Banking Industry's Step Child.
2. It is a business opportunity which is being missed by banks.
3. If depositors see and experience the utility of having bank accounts which are easy to use in their local language and will less bureaucratic hassles, it would be in their own interest that they would seek to fulfill KYC requirements on their own. Bank's have to create the ease of operations.
4. Dilution of KYC requirements by waiving "proof of residence" or other criterion is not being questioned or desirable.
bpugazhendhi
11 months ago
Post office savings banks are the most convenient for this target. They are ubiquitous and approachable as well as simple. Govt should leverage on this already existing network and modernise it further.
sushilprasadassociates
Replied to bpugazhendhi comment 11 months ago
The Post Office Payment Bank has still to get its act together.
m.prabhu.shankar
11 months ago
Govt should focus on the work that it should do instead of doing the work of citizens. Govt can never do the work of citizens and hence it should refrain from doing it otherwise it will end in a failure. Opening bank accounts, Building toilets etc.. are the work of Citizens. They will take care of it when its required for them. Govt should just focus on three important things as of now. Employment generation on a mass scale, Free Education till under graduate for every citizen, Free Health care for every citizen. Rest of all, Citizens will take care.
sushilprasadassociates
Replied to m.prabhu.shankar comment 11 months ago
An efficiently functioning financial sector which includes helping all have functional savings deposit facilities would be very helpful in insuring some aspects of financial security for the masses.
homaielavia
11 months ago
KYC on an annual basis is sheer nuisance. Yes KYC when opening an account is valuable. Thereafter, when there are regular normal transactions in the account, providing KYC , with documentation proof, seems waste of time and energy. Unusual activity in any account can easily be flagged and KYC demanded in such cases.
sushilprasadassociates
Replied to homaielavia comment 11 months ago
There is a lot of confusion in understanding role of KYC among bankers. To cover up their ignorance they ask for KYC all the time. Some time back I got letters from my bank requesting for updation of KYC for two of my accounts. I was mystified since KYC is for the customer and not for accounts, and moreover I had recently updated my KYC. I did some digging and found that the letters related to two of my FDs which had already matured and been paid off! So I politely replied as to whether KYC has to be done for closed accounts too and requested them to send me the relevant RBI instructions. I followed up with a couple of reminders. As expected they never replied.
Meenal Mamdani
11 months ago
In Africa, phone banking is widespread and safe. The people are as poor as the Indians, so how do they manage it?
sushilprasadassociates
Replied to Meenal Mamdani comment 11 months ago
Their payment and settlement systems regulations are more accomodative. It has some severe pitfalls. Payment banks were licenced in India to provide such services while taking care of the problems involved. They have their own set of problems. Of the 11 payment banks licensed by RBI, 3 did not set shop, and one closed down. Other than PayTM one does not get to see much visibility of the others.
rajoluramam
11 months ago
What about KYC of fradusters?
No need. Only the poor small time depositors require KYC or else the account is blocked. As the " jan dhan account holders might be having small balances or may be zero balance, neither the bank nor the customer is interested in KYC. Why only in Assam. There may be lakhs of jan dhan account holders who have not submitted KYC documents in the country.
sushilprasadassociates
Replied to rajoluramam comment 11 months ago
If the account holder perceives value of maintaining the account, it is in his / her incentive to periodically ensure that KYC is updated.
sushilprasadassociates
Replied to rajoluramam comment 11 months ago
Even if JDY accounts have small balances, it is in Bank's long term interest to see how regular operations take place so that the account does not become dormant. KYC needs to be done of every account holder without fail to ensure that fraud is kept in check. Thanks.
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